November 25, 2008
The Citigroup Bailout: More Confusion
The markets hailed the fact of the Citigroup bailout, but we are just now digesting the details. Last month Treasury bought $25 billion in preferred stock and warrants (at-the-market and equal to 10% of the value of the preferred). Yesterday, the Treasury bought an addition $20 billion in preferred stock and warrants. The second batch of preferred stock pays an 8% dividend; the first batch pays 5% for five years and 10% thereafter. The new batch restricts dividends on common to $.01 a share for 3 years without Treasury's consent; the old batch restricted an increase in dividends on common. All the preferred is non-voting. The big change is in control of executive compensation. The new preferred requires that any compensation plans must be submitted to and approved by the "USG." The old preferred had open-ended compensation "standards" and a ban on oversized golden parachutes. But wait.... there is something completely new... a government guarantee on a $306 billion pool of Citi's mortgage-backed securities (not 100% but with total exposure of $249 billion) in exchange for another $7 billion in preferred ($3 billion bought by the FDIC). This new wrinkle fuels the ad hoc nature of bank bailouts and adds to market uncertainty over the bailout program. The FDIC involvement hides a spirited debate between Paulson and Blair over the extent of FDIC exposure, an inter-agency debate that affected the final plan. We also note with much interest that Robert Rubin, the new man behind the scenes in the Obama economic team was on the Citi board. Who is in control here and who is making policy??? Now we wait for the new heavily negotiated, company specific bailout and wonder about transparency, standards and political power. Wonderful way to calm the markets.
The new bailout protects Citigroup debt and does not, yet anyway, dilute the common stock significantly. The price of Citi common rose on the announcement.
November 25, 2008 | Permalink
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As of Friday, Citi's market cap was $20.5B. The Gov has already bought $25B in equity during the bailout, and is $20B more; yet, thier equity control is supposedly limited to 7.8%, rather than owning the whole company twice over, potentially even considering a premium over market rates for control blocs of stock at hostile takeover prices. This isn't a bailout, its a handout, and a ripoff to taxpayers. Its too bad the average taxpayer has no idea how these bailouts are structured and actually function, because if they did, there would be riots in the streets.
At Friday's close Citi had a mkt cap of $20.5B. 7.8% of that is $1.6B. So the Gov paid $20B + backstopped hundreds of billions in asset losses for $1.6B in market value of C stock. What a deal.
Compare this to AIG's bailout. With Citi, the issued preferred stock has warrants to buy 254 Million shares. That's 4.7% of the 5.4 Billion outstanding shares at $10.61/shr (mkt price Friday was $3.25). For all intensive purposes, Citi is getting a truckload of free money. This was not the case with AIG, which was forced to give up 80% of its equity for the capital infusion (causing shareholders to take a bath) in addition to a crushing 11.5% interst rate on the borrowed funds (Citi's dividend rate will only be 8%).
There is no consistency in the government's moves, and this only adds to the market confusion. Whats more, the potential for croynism is becoming a very serious problem.
Posted by: Mike Rosemeyer | Nov 25, 2008 7:56:59 AM
Citigroup Inc., doing business as Citi, is a major American financial services company based in New York City, NY. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate Travelers Group on April 7, 1998. Citigroup Inc. has the world's largest financial services network, spanning 107 countries with approximately 12,000 offices worldwide. The company employs approximately 358,000 staff around the world, and holds over 200 million customer accounts in more than 100 countries. It is the world's largest bank by revenues as of 2008. It is a primary dealer in US Treasury securities and its stock has been a component of the Dow Jones Industrial Average since March 17, 1997. Citigroup, which had huge losses during the global financial crisis of 2008, was rescued in November 2008 in a massive bailout by the U.S. government
Posted by: Sukral | Nov 26, 2008 10:16:42 PM